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Overseas Flight From Wall Street

Are foreign investors souring on Wall Street? The data say yes.

In September and August, foreign investors were net sellers of $5.9 billion of American stocks, according to the latest Treasury data available. These two monthly declines highlight a sharp slowdown in inflows from abroad since the beginning of the year, when the 12-month total through February was $58 billion. In September, the 12-month inflow had dropped to $18.7 billion.

While there have not been negative consequences for the American stock market so far, a steeper decline in the dollar could increase the net outflows and make American equities less attractive.

The net selling of American stocks by foreigners has probably continued since September, said Ian Scott, a global equity strategist with Lehman Brothers in London, "because the dollar has continued to fall, and I think that is one of the motives behind the outflow."

He also said that Lehman's recent surveys showed that global investors were less interested in stocks generally and that those who were buying stocks were looking for value stocks, which are easy to find outside the United States.

Bob Froehlich, chief investment strategist at Deutsche Asset Management, said that fear that the United States' current-account deficit would continue to grow, along with the belief abroad that the federal budget deficit will be difficult to reduce because of the war on terror and President Bush's promises to make his tax cuts permanent, "has spooked some investors outside the United States."

Such fears have yet to have any impact on the recent performance of the United States stock market. Indeed, as William E. Rhodes, chief investment strategist of Rhodes Analytics in Boston, noted, "It is an old rule of thumb that foreigners are the last in and the last out." So it is possible that this outflow is a contrarian signal for the stock market.

Foreign investors, for example, were pouring their money into American stocks at a 12-month rate of $153 billion in March of 2001, a year after the American stock market peaked at all-time highs. On the other hand, as the 1990's stock rally took off in 1995, foreign investors were selling American equities at a 12-month rate of $8.4 billion in March of that year.

In fact, if the net outflow of foreign investors from the stock market did continue in October and November, domestic investors clearly did much more than pick up the slack. Since Oct. 25, the Standard & Poor's 500-stock index has jumped 7.5 percent and is now up 5.9 percent for the year. At its recent closing peak of 1,184.17, the S.& P. 500 index was at its highest level in more than three years.

Mr. Rhodes also argued that a Wall Street rally driven by domestic investors was healthy.

"We would like to have foreign participation, but it is healthier to have a domestic rally," he said, "because foreign money is more likely to leave."

But many analysts think that the dollar, which is down 2.7 percent this year against a broad index including the United States' trading partners and much more against some individual currencies, will fall sharply in the months ahead. Such a decline, they argue, would not be good for stocks here.

If there is a steep dollar decline from here, Mr. Froehlich of Deutsche Asset Management said the stock market "will be hard pressed to get positive returns in that environment."

The United States and its allies are clearly willing to let the dollar fall further without any coordinated statements or coordinated intervention in the foreign exchange market to slow the decline, analysts said yesterday, citing recent statements from the Bush administration and the meeting of the Group of 20 industrialized countries over the weekend in Berlin. Only the Japanese are expected to intervene to slow the yen's climb in value and the dollar's fall in an effort to protect the country's export business.

If the dollar continues to decline, Mr. Froehlich said the best performers on the United States market would be the big American companies that get a great deal of their earnings from abroad, because a weaker dollar increases the value of foreign profits. Among this group, based on annual sales abroad, are Exxon Mobil, Ford Motor, I.B.M., General Electric, General Motors, Intel and Procter & Gamble, according to Standard and Poor's.

He said that in such an environment, stock picking would be very important because he suspected that only about 50 of the 500 stocks in the S.& P. stock index would have gains.

Mr. Froehlich, however, is not predicting a sharp decline in the dollar. He expects that it will fall 3 or 4 percent more by the end of the year, based on the Federal Reserve's broad dollar index. At that level, the dollar would be about 9 percent from the recent low that the dollar reached in 1995 and about 10 percent from the record low the dollar hit in 1978, based on the Fed's index.

He said the dollar could rally then as foreign investors realized that the American economy is still growing nicely and that the Federal Reserve will keep pushing interest rates higher, making investments in bonds here more attractive.

But other analysts are predicting a steep fall for the dollar, one that could take it to or below the record lows against it reached in 1995 against major European currencies and the Japanese yen.

One reason for those predictions is that the American current-account deficit, which the broad gap between the nation's exports and imports of goods and services, is heading to a record of more than $600 billion this year.

And Alan Greenspan, the chairman of the Federal Reserve, warned on Friday that such a deficit could mean foreigners would be net sellers of not only American equities, but also bonds, helping send stocks lower and interest rates higher.

"It seems persuasive that, given the size of the U.S. current-account deficit, a diminished appetite for adding to dollar balances must occur at some point," Mr. Greenspan said in a speech in Frankfurt.

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